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Behavioral Economics and
Environmental Policy
Fredrik Carlsson and Olof Johansson-Stenman
Department of Economics, University of Gothenburg, SE 405 30 Gothenburg,
Sweden; email: [email protected], [email protected]
Annu. Rev. Resour. Econ. 2012. 4:75–3
Keywords
First published online as a Review in Advance on
May 11, 2012
voluntary cooperation, fairness, self-image, social approval, status,
crowding-out effects, context dependency, incoherent preferences,
risk misperception, ambiguity aversion, regulator bias
The Annual Review of Resource Economics is
online at resource.annualreviews.org
This article’s doi:
10.1146/annurev-resource-110811-114547
Copyright © 2012 by Annual Reviews.
All rights reserved
JEL: D03, Q50, Q53, Q54
1941-1340/12/1010-0075$20.00
Corresponding author
Abstract
This article provides an interpretive survey on implications of
insights from behavioral economics for environmental policy. In
particular, it discusses whether, and if so how, policy implications
based on conventional economic theory have to be modified when
insights from behavioral economics are considered. More specifically, it discusses concerns for cooperation, fairness, self-image,
social approval, and status. Moreover, it addresses potential crowdingout effects, context-dependent and incoherent preferences, risk misperceptions, ambiguity aversion, and regulator bias. We conclude
that behavioral economics has a lot to offer environmental economics and that some normative policy recommendations have
to be modified. Yet the most fundamental policy recommendations
in environmental economics generally prevail and are sometimes
even reinforced through behavioral economics insights.
75
1. INTRODUCTION
Behavioral economics (BE) has recently attracted an increased interest within the economics
community. In contrast to conventional economic theory, BE emphasizes the following:
1. People’s behavior is not motivated solely by their own material payoffs, and issues such
as perceived fairness and social norms often influence human decisions.
2. We act in a social context, and issues such as social approval and status are central
motivators of human behavior.
3. People have cognitive limitations and therefore sometimes make seemingly irrational decisions.
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In the present paper we consider each of these three characteristics of BE, for which there
is a great deal of empirical evidence, and reflect on potential implications for environmental policy.
As noted by Ashraf et al. (2005) and Evensky (2005), Adam Smith emphasized that
people’s behavior is not motivated solely by their own material payoffs and that factors
such as perceived fairness and social norms often influence human decisions. This is particularly clear in his work The Theory of Moral Sentiments (Smith 1759). Such prosocial
behavior is of particular relevance for environmental policies because behavior with
environmental consequences is often considered to be of moral concern. Regarding limited cognitive limitations and irrationality, we here focus on context-dependent preferences. For other recent survey treatments in behavioral and environmental economics, see,
e.g., Brekke & Johansson-Stenman (2008), Carlsson (2010), Gowdy (2008), JohanssonStenman & Konow (2010), List (2006), and Shogren & Taylor (2008).
Some areas of environmental economics adopted insights from BE quite early on,
whereas there has been much more hesitation to do so in other areas. The stated-preference
(SP) literature was early on influenced by both behavioral and experimental economics,
and BE may have been influenced to some extent by the SP literature; indeed, some
economists, including Glenn Harrison, Jack Knetsch, John List, and Jason Shogren, have
made important contributions in both behavioral and environmental economics. One
reason for this mutual interest was most likely the anomalies found in SP studies. For
example, the empirical findings regarding the huge differences between willingness to
pay (WTP) and willingness to accept (WTA) (Hammack & Brown 1974, Horowitz &
McConnell 2002) resulted in a number of experimental studies (see, e.g., Bateman et al.
1997, Kahneman et al. 1990) and theoretical model developments (see, e.g., Hanemann,
1991, 1999; Tversky & Kahneman 1991). A second reason was the similarities of the
experiments and valuation exercises and the use of experimental methods to test the
validity of hypothetical surveys (see, e.g., Carlsson & Martinsson 2001, Cummings et al.
1995, Frykblom 1997, Lusk & Schroeder 2004, Neill et al. 1994).
The remainder of the paper is organized as follows. Section 2 discusses voluntary
cooperation and fairness perceptions, i.e., implications of the fact that we sometimes act
on the basis of motives other than our own material payoffs. Section 3 discusses the
importance of self-image, social approval, and status concerns for human behavior and
environmental policy. Section 4 discusses how our internal motives are sometimes crowded
out by monetary incentives. Section 5 deals with context-dependent and incoherent preferences and Section 6 with risk misperception and ambiguity aversion. Section 7 discusses the
behavioral limitations of the regulator. Section 8 provides some concluding remarks.
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2. COOPERATION AND FAIRNESS
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The distributional implications of both costs and benefits associated with policies
designed to address environmental problems, such as car emissions, water pollution, toxic
substances, and global climate change, are critical for policy makers across the world.
Although fairness concerns are frequently discussed in many different public policy areas,
they sometimes appear to be particularly important for environmental issues. Because the
distributional implications differ dramatically between different policy instruments such
as environmental taxes, fuel economy standards, and tradable emission permits (based on
auctioning or grandfathering), this may not be very surprising.
2.1. Cooperation Based on Conventional Economic Theory Versus
Behavioral Economics
Conventional economic theory presupposes that people free ride when it is in their material self-interest to do so and that they do not care about issues such as perceived fairness.
Yet we know that people sometimes do cooperate, even when it is not in their own narrow
self-interest, and that they often care about perceived fairness in addition to their own
payoff. In BE there is a large experimental literature trying to understand under what conditions people cooperate. The environment-related literature is smaller, but rapidly increasing.
Most of the literature on negotiations related to transnational pollution is based on
the assumption that each negotiating country cares solely about its own material payoff;
see, e.g., Carraro & Siniscalco (1998) and Asheim et al. (2006). Some of the literature
allows for collusion, i.e., the possibility that some countries cooperate with one another
against other countries. Carraro & Siniscalco (1993) and Barrett (1994) provide the
standard approach to studying coalition formation in the climate change context. In this
two-period noncooperative framework, countries first decide whether to join a coalition.
Those who join will then behave cooperatively with one another in a second stage, and
both the coalition (as an entity) and the remaining countries choose their emission levels
noncooperatively. Carraro & Siniscalco (1993) and Barrett (1997) demonstrate that the
resulting coalition size in this framework tends to be rather small. However, Lange & Vogt
(2003) show that when countries care about fairness, and hence not only about their own
payoffs, the coalition size tends to be larger. Yet in the generalization by Lange (2006),
which allows for asymmetries such that countries are different, it is no longer obvious that
fairness concerns increase the coalition size. Moreover, Lange et al. (2008) study fairness
bias in international climate policy on the basis of a survey of approximately 200 climate
policy negotiators on three continents. The results indicate that these negotiators generally
favor fairness rules that impose lower costs on their region and hence higher costs on those
in other regions. This finding suggests that self-serving bias, i.e., an unconscious distortion
of the individual’s own beliefs about what is fair in the direction of his or her material
interests, plays a nonnegligible role, which is further supported by the finding that respondents tend to view their own preferences as less self-interested than those of others.
In contrast, Oberholzer-Gee et al. (1997) analyze fairness views of different procedures
for the siting of nuclear waste, on the basis of survey evidence from a sample of the general
Swiss population, and find strong support for processes that respect impartiality, information, consent, and fairness. In addition, people were more willing to accept a burden
in the presence of processes that respected such values.
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Many experimental results can be interpreted in terms of conditional cooperation,
suggesting that many people are willing to choose the cooperative alternative, but only if
others do too (Fischbacher & Gächter 2010). Shang & Croson (2009) and Alpizar et al.
(2008a) investigate, by using natural field experiments, how contributions to good
causes—a public radio station and a natural park, respectively—are affected by information about a typical contribution by others. Both studies find a positive relationship.
There is also much evidence that people care about social norms, such as the norms to
recycle or to conserve energy. The explicit use of social norms has recently been analyzed
by economists, and for a longer time by psychologists, in the context of energy conservation. This literature demonstrates that reminders about environmental effects related
to energy use as well as information about self-consumption and others’ consumption of
energy can substantially affect self-consumption of energy; see, e.g., Schultz et al. (2007)
and Allcott & Mullainathan (2010). Ferraro et al. (2011) and Ferraro & Price (2011)
analyzed both short- and long-term effects on water consumption. They find that both
information about the negative effects of water consumption on the environment and
information about self-consumption of water compared with others’ water consumption
have a sizable short-run effect on self-consumption of water. However, these researchers
also find that only messages augmented with social comparisons have a lasting effect.
Environmental labeling, or ecolabeling, is a related policy instrument that makes use of
people’s willingness to behave—voluntarily or perhaps via the influence of peer pressure—
in an environmentally friendly manner; see, e.g., Cason & Gangadharan (2002) or Stephan
(2002) for an overview.
To achieve prospering economic and social development, a prerequisite is being able to
handle social dilemma–type situations, such as providing an adequate amount of public
goods (Hall & Jones 1999, La Porta et al. 1999, Ostrom 2009). In industrialized countries,
this is dealt with largely by formal institutions. However, most poor countries have weak
or badly functioning governments. Thus, a large share of public goods has to be provided
privately with the help of local institutions and mechanisms; see Olken & Singhal (2011)
for a recent overview of local public good provision in rural areas in developing countries.
Over a long period, Ostrom and coauthors have also carefully analyzed the effects of
different institutional settings on the abilities of local societies, in particular in developing
countries, to effectively handle social dilemma–type situations (see, e.g., Dietz et al. 2003;
Ostrom 1990, 2009; Ostrom et al. 1992).
Moreover, when one is considering the global environment, it is not sufficient to
have well-functioning national institutions. Rather, we have to solve problems internationally, meaning that we need some kind of effective transnational institution. In
addition, we are not dealing with individual decision making, at least not in the sense
that the decisions are made with respect to personal consequences. Although generalizing the experimental findings from individuals to a multicountry negotiation setting is
not straightforward, we believe that some insights can be generalized, at least qualitatively. From the literature on group decision making, it is not clear whether people
become more or less cooperative in a group decision situation relative to when they are
acting as single individuals. Cason & Mui (1997) find that teams tend to be more
altruistic and other-regarding than individuals, whereas Luhan et al. (2009) argue that
the Cason & Mui study constitutes an exception and that most studies find that groups
of people are typically less altruistic and less cooperative than individuals. However,
Dannenberg et al. (2007) find in an experimental study that climate policy negotiators
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have stronger preferences for equity compared with students, who are typically used
as subjects.
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2.2. Less Encouraging Insights on Cooperation from Behavioral Economics
BE does not bring only good news about human behavior and our ability to cooperate.
For example, as discussed above, there is also plenty of systematic evidence in favor of
self-serving bias. Babcock & Loewenstein (1997) observe that in wage negotiations, when
facts or principles are ambiguous, both employers and employees seem to focus on the
ones that favor their own interest. Thus, although people typically care about fairness,
our perception of what is fair tends to be influenced by what is in our own interest, and
this view often affects our actions. According to Elster (1999, p. 333), “Most people do
not like to think of themselves as motivated only by self-interest. They will, therefore,
gravitate spontaneously towards a world-view that suggests a coincidence between their
special interest and the public interest” (italics in original). Although a preference for
equity may improve the possibilities for cooperation in climate negotiations, as analyzed
by Lange & Vogt (2003), this picture is much less clear when the equity principles used
are influenced by self-serving bias (Lange et al. 2010).
Somewhat similarly, we often try to avoid situations in which we know that we will
feel the pressure to act in accordance with norms that are inconsistent with our own
material self-interest. This was tested by Dana et al. (2006), who offered their subjects
the choice between playing a $10 dictator game and a $9 exit option: If the dictator
chose the exit option, the receiver was not told about the existence of a game (or about a
potential sender). Many subjects chose the exit option. This was despite the fact that this
alternative was Pareto dominated (if the subjects cared only about the material payoffs)
because the subjects could have played the game and either kept $10 or kept $9 and sent
$1 to the receiver. Hence, the decision to choose the exit alternative cannot be explained
either by standard selfish preferences, in which case all subjects would have preferred the
$10 dictator game and kept everything for themselves, or by a combination of preferences
for one’s own payoffs and payoffs for the other player. Instead, it seems that most of us
dislike when others think badly of us, even in anonymous situations. An implication of
this conclusion is that people, including policy makers and politicians, in the richer parts of
the world may simply try to avoid thinking about the ethical implications of their behavior,
or they may avoid discussions with poorer countries about the issue.
Cognitive dissonance (Aronson 1992) constitutes a related negative insight from BE
regarding our possibilities to deal with environmental issues in a responsible way. Cognitive dissonance means that an inconsistency between beliefs and behavior causes an
uncomfortable psychological tension, sometimes implying that people change their beliefs
to fit their behavior instead of changing their behavior to fit their beliefs (as is conventionally assumed). With respect to climate change, this principle may imply that people who
cause large greenhouse gas emissions, e.g., people in the Western world, tend to believe
that climate change problems are exaggerated; see, e.g., Stoll-Kleemann et al. (2001).
Finally, there is ample evidence that people’s behavior in repeated games tends to
become less cooperative over time and converge toward the conventional Nash equilibrium, unless there is a possibility to punish free riders so that cooperation can be
maintained (Fehr & Gächter 2000, Fischbacher & Gächter 2010). Ostrom (1990) provides extensive real-world evidence that sanction possibilities are essential for successful
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common property resource management. Thus, although people sometimes cooperate
voluntarily, even when it is not in their own material self-interest, such cooperation tends
to dissipate over time with repeated interaction, unless some kind of policy instrument,
formal or informal, is applied.
Taken together, what can we learn from the BE literature on cooperation and fairness
for environmental policy? First, individuals and groups, including countries, are able to
make decisions that are not in their own material interest if they perceive that it is possible
to obtain an outcome that is socially desirable by means that are considered reasonably
fair. Therefore, policy instruments such as labeling and voluntary recycling are often considerably more effective than what the conventional theory would predict. Second, when
people or countries are affected in a nonnegligible way, they, through a combination of
mechanisms, will likely gravitate toward free-riding behavior unless sufficient policy
instruments are applied. This means that the conventional economic wisdom regarding
many environmental problems, including climate change—i.e., that it is important to “get
the prices right” through economic policy instruments and that exceptions to these policy
instruments are avoided as much as possible—is reinforced rather than made obsolete by
insights from BE.
3. SELF-IMAGE, SOCIAL APPROVAL, AND STATUS CONCERNS
Most of us care about who we are, how we perceive ourselves, and how others perceive us.
Indeed, when Brekke et al. (2003) investigated people’s motivation behind recycling in a
Norwegian survey, as many as 73% of the respondents answered that one of their main
reasons was that they would like to see themselves as responsible citizens. JohanssonStenman & Martinsson (2006) asked people about what characteristics they considered
important when buying a car. Most claimed environmental characteristics to be very
important, but very few emphasized the status associated with a specific car or model. Yet
when people were asked about what characteristics they believed were important for
others, the reverse pattern emerged insofar as status became much more important and
environmental aspects less important. This finding underlines both the importance of
seeing ourselves as responsible individuals and the reality that we like to see ourselves as
better than others in many dimensions, including social responsibility.
The self-image motive should not be confused with the willingness to impress or provide
informative signals to other people. For a recent analysis of the latter motive for prosocial
behavior, see, e.g., Ellingsen & Johannesson (2011). In an environmental context, List
et al. (2004) show that respondents are much more willing to vote in favor of a costly
environmental project if others are informed about their choice. The self-image motive can
also be seen as self-signaling (Bodner & Prelec 2003, Benabou & Tirole 2006), implying
that opinions and actions provide signals to ourselves about what kind of person we are,
including our intentions toward the matter at stake. This distinction is far from new, as
is evident from the following characterization by Adam Smith some 250 years ago (Smith
1759, p. 170):
Nature, accordingly, has endowed him, not only with a desire of being
approved of, but with a desire of being what ought to be approved of; or of
being what he himself approves of in other men. The first desire could only
have made him wish to appear to be fit for society. The second was necessary
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in order to render him anxious to be really fit. The first could only have
prompted him to the affectation of virtue, and to the concealment of vice.
The second was necessary in order to inspire him with the real love of virtue,
and with the real abhorrence of vice. In every well-formed mind this second
desire seems to be the strongest of the two.
Thus, according to Smith, the self-image motive tends to be the stronger of the two motives,
which is an empirical question that may vary from case to case.
The existing literature on ecolabeling and green consumerism, as well as that on fair
trade, has often been framed within a classical market context in which price and quality
are the drivers of consumer choice. However, consumers may also be concerned with the
choices made by other consumers, and people’s consumption decisions may therefore
not be independent of social context. Numerous recent experimental studies show that
conformity to what others do is one important factor affecting people’s charitable giving
(e.g., Alpizar et al. 2008a, Shang & Croson 2009, Frey & Meier 2004) and contributions
to public goods (Bardsley & Sausgruber 2005). On the basis of an SP survey on coffee
consumption, Carlsson et al. (2010) find that information on the choices made by other
consumers significantly affects the choice of ecolabeled coffee for women but not for men.
Of course, people can gain status and reputation from many sources other than unselfish
behavior. Indeed, material wealth and conspicuous consumption are often seen as prime
ways of obtaining social status (e.g., Frank 1999). The type of consumption that creates
status varies between contexts and time. Although driving a Toyota Prius may, at least in
some contexts, provide social status, driving a Rolls-Royce or a new Ferrari contributes
more to social status in other contexts. Indeed, a growing empirical literature shows that in
addition to the absolute level of consumption, people are concerned with their consumption
relative to that of others; see Clark et al. (2008) for a good overview. For the particular
example of the Toyota Prius, Sexton & Sexton (2011) show that the willingness to pay for
the “green halo” of driving a Prius varies significantly with the environmental friendliness
of one’s neighbors. Correspondingly, a growing public finance literature deals with the normative implications of relative consumption concerns. It is usually assumed that people care
intrinsically about relative consumption but not about relative leisure, implying that there
are negative (positional) externalities from the consumption of goods but not from leisure.
This implies an efficiency reason for taxing consumption that has to be compared with the
conventional tax-wedge argument that goes in the other direction; the latter argument
suggests that because we cannot tax leisure directly, we tend to have too much leisure
(e.g., Boskin & Sheshinski 1978). Aronsson & Johansson-Stenman (2008) argue, on the
basis of empirical evidence, that such a positional externality motive may imply substantially
higher marginal income taxes than what would result on the basis of the conventional
optimal nonlinear income taxation model.
Relative consumption concerns also have implications for the optimal provision of
public goods, including environmental public goods. Wendner & Goulder (2008) show
that the optimal provision of public goods tends to be larger when people are motivated
by relative consumption concerns than when they are not. The intuition is that there is
a zero-sum-game element in private consumption because my increased consumption
implies lower utility for you, whereas there is no such element in public consumption.
Aronsson & Johansson-Stenman (2008) show that the optimal public good provision rule
tends to be affected correspondingly such that, in the first-best case, the optimal provision
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should exceed the level at which aggregate marginal WTP for the public good equals its
per-unit price. Yet this is the case only when each individual’s marginal WTP is measured
ceteris paribus, i.e., holding everything else fixed. If WTP is measured conditional on
making all other individuals pay the same amount for the increased public good provision
on the margin (which corresponds to a referendum payment vehicle in the contingent
valuation literature), then the first-best provision rule coincides with the basic Samuelson
rule. The intuition is that in the latter case, an increased public good provision comes
together with a decreased consumption for you but also with a decreased consumption
for others, whereby the latter is good for you through decreased positional externalities.
What about policy implications related to status effects of prosocial behavior? At the
current level of normative economic theory, we cannot say much here. The same applies to
the issue of changing fashion with respect to what contributes to status. One might suggest
that it would be socially advantageous if it became more fashionable to drive a Toyota
Prius than to drive a Hummer, but even so, we have limited knowledge about how environmental and economic policies affect such trends.
4. CROWDING OUT VERSUS CROWDING IN
Much research and most textbooks in environmental economics stress the efficiency
advantages of market-based policy instruments, such as taxes, subsidies, and tradable
permits, as opposed to command-and-control-based policy instruments. The main reason
is well known: Market-based instruments imply that additional abatement activities are
undertaken when a firm’s marginal abatement costs are lower than what the firm would
have to pay for these emissions otherwise, e.g., in terms of environmental taxes. If, in
contrast, the marginal abatement costs are larger than the per-unit tax on the emission,
additional abatement activities will not be undertaken. In this way, the least expensive
abatement activities, per unit of abatement, will be undertaken in the economy. The crucial point is that the government does not need to have any information about how
costly certain abatement activities are to obtain such cost efficiency. With a commandand-control system, the government may in principle also decide that all abatement activities for which the marginal abatement costs are lower than a certain predetermined value
should be undertaken. Yet in this case the government needs detailed information about
the costs of these abatement activities to implement this decision. Moreover, individual
firms generally do not have incentives to reveal their true abatement costs.
However, the standard model of environmental regulation is of course based on a number of simplifying assumptions. One of these is that firm decisions are made purely on
the basis of profit maximization and that individual decisions are made purely on the
basis of material self-interest. In a strict sense, this assumption is not correct. Indeed,
many of us try to a varying degree to behave in an environmentally friendly way, even
when we have no monetary incentives for doing so, as discussed above.
Yet that people are motivated by objectives other than pure material self-interest is
no argument against market-based policy instruments. What is essential is instead the
interaction between market-based policy instruments and nonmaterial motives. In this
regard, it has been argued that monetary incentives may potentially undermine individuals’ moral or intrinsic motivation to contribute to a better environment. For example, Frey & Oberholzer-Gee (1997) provide empirical support for such crowding-out
effects using a survey related to the location of a nuclear waste repository facility. These
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researchers find that individuals are less willing to accept siting of the facility in their
community if they are offered monetary compensation. If such crowding-out effects are
present, they may reduce, or potentially even reverse, the positive environmental impacts
of green taxes.
There is also evidence from so-called natural field experiments of crowding-out
effects. In an often-cited study, Gneezy & Rustichini (2000a) find that imposing a
fine on parents arriving late to pick up their children at day care increases the number
of late-coming parents. The intuition is straightforward: If you have paid a fine for
picking up your kid late, you feel that you have the right to do so. Without such a fine,
you instead feel that you must do your best to prevent lateness. Similarly, Gneezy &
Rustichini (2000b) find that among high school students collecting donations for a
charitable cause, those students who were paid a small percentage of their collections
(financed by the researchers) collected less than those who were not paid. The authors
also find that those students who were paid a large percentage of their collections collected more than those who were not paid, in line with what the standard model
predicts. Together this finding shows that in the case considered, two effects are at
play: a positive direct effect of incentives and a negative indirect effect of crowding out
intrinsic motivations. Mellström & Johannesson (2008) analyze experimentally a classic
issue in the crowding-out literature (cf. Titmuss 1971), namely whether offering monetary compensation for donating blood increases or decreases the amount of blood
donated by the general healthy population. They find that women who are offered a
monetary compensation for donating blood donate less than half the time compared
with those who are not offered monetary compensation, whereas there is no statistically
significant effect for men.
However, do monetary incentives always crowd out intrinsic motivation? According to
a careful reflection on the literature by Nyborg (2010), this is certainly not the case.
Nyborg discusses that possible crowding-in effects may be less mentioned in the literature
because such effects are harder to disentangle empirically from the direct effects of economic incentives; these effects go in the same direction.
Next, on the basis of fundamental psychological mechanisms and insights from BE, we
reflect on both potential crowding-out and crowding-in effects. Let us start with crowdingout effects. A first condition for crowding out to occur is that the individuals have intrinsic
motivation such that there is something that can be undermined. Given that such intrinsic
motivation exists, the most obvious crowding-out reason is that introducing a price may
psychologically transform the decision from an ethical one to an economic one. Second,
according to cognitive evaluation theory (Deci 1975, Deci & Ryan 1985), which is a
theory in psychology designed to explain the effects of external consequences on internal
motivation, intrinsic motivation is undermined if the public perceives the environmental
tax as controlling. Third, if an individual has a preference for a self-image as a morally
responsible person, economic incentives may undermine moral motivation as the individual becomes unsure about whether environmentally friendly behavior is driven by
intrinsic motivation or by economic incentives.
Next, we consider potential crowding-in effects. First, cognitive evaluation theory predicts that an extrinsic motivation such as a tax reinforces one’s intrinsic motivation if the
tax is perceived as acknowledging rather than as controlling. Second, because an environmental tax makes it relatively cheaper to behave in an environmentally friendly way, it
becomes more economically attractive to have a self-image as an environmentally friendly
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person. Third, the case for adjusting the perception of reality due to cognitive dissonance,
in the sense that one may doubt the existence of an environmental problem rather than
change one’s behavior, becomes weaker for the same reason, i.e., that environmentally
friendly behavior becomes relatively cheaper. Fourth, for the same reason, other people
are likely to behave in a more environmentally friendly manner, which is likely to promote
such behavior due to conditional cooperation.
If the above factors are taken together, there is not a strong case for arguing that
economic policy instruments would crowd out intrinsic motivation. This is not to say that
economic policy instruments are always superior to command-and-control policies.
Indeed, the latter may sometimes be superior for other reasons, e.g., reasons related to
measurability or administrative costs. Yet in cases in which economic policy instruments
appear superior when crowding effects are disregarded, we see no reason that such effects
would make economic policy instruments less attractive. Crowding effects sometimes
make such instruments slightly more attractive and sometimes make such instruments
slightly less attractive.
5. CONTEXT-DEPENDENT AND INCOHERENT PREFERENCES
People’s behavior and preferences are affected by the context, and even subtle cues affect
behavior. Context is a broad concept and includes aspects discussed in other parts of this
article. For example, information about what others do affects whether and how much
people donate to charitable organizations (Alpizar et al. 2008a, Bardsley & Sausgruber
2005, Frey & Meier 2004, Shang & Croson 2009). Shang & Croson (2009) find that
contributions to a radio station were affected by information about a typical contribution. They find that the highest reference amount ($300) resulted in a significantly
higher contribution than when no information about contributions was given. Whether
others observe the action in question is also important under certain circumstances
(e.g., Alpizar et al. 2008a, Hoffman et al. 1996, Legget et al. 2003, List et al. 2004).
For example, Soetevent (2005) find that the use of open baskets, such that close neighbors in the church could identify a donor’s contribution, increased overall contributions
by approximately 10% in the second offering of the service compared with the use of
closed baskets.
What are the implications for environmental economics if preferences are context
dependent? In the area of environmental valuation, context dependence is not really something new. There has always been an awareness that, for example, how information is
presented and whether the action is observed by others affect respondent behavior. What
we have learned from the BE literature is that context dependence is not unique to
SP methods or to environmental goods. At the same time, context dependence has implications for validity tests of SP methods (Carlsson 2010): Comparisons between hypothetical and actual behavior should be done for a given context. For example, comparing
or combining results from SP and travel cost studies could be problematic due to large
contextual differences. The observed difference may be due not to the standard explanation of hypothetical bias, but instead to important contextual differences, such as a difference in the extent to which the actions are observed, or are perceived to be observed, by
others. As discussed in Carlsson (2010), one interesting question is whether behavior is
more context sensitive in the hypothetical (survey) domain than in the domain of choices
involving real payments. Another question is to what extent we can use hypothetical
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research methods to investigate the role of context dependence.1 One of the few studies
that compare context dependence in both a survey setting and a natural field experiment
is Alpizar et al. (2008b). In this study, some subjects made actual contributions, whereas
others stated their hypothetical contributions. Both the degree of anonymity and the
information provided about the contributions of others influenced subject contributions
in the hypothesized direction. This study concludes that the influence of the social contexts
was approximately the same when the subjects made actual monetary contributions as
when they stated their hypothetical contributions, suggesting that SP methods could be
used to make inferences about contextual effects. However, context dependence per se
also has implications for the welfare analysis on the basis of, for example, SP studies.
Again, these implications are not unique for SP methods but are a problem for any welfare
analysis; see, e.g., Tversky & Simonson (1993) and Shogren & Taylor (2008).
However, people may not only act differently depending on the context; they may
also act against what is in their best interest. It is often difficult to determine what is in
the best interest of a person, and this reality is perhaps an additional complexity of the
problem at hand; i.e., not only do people sometimes act against their best interest but it
is also difficult to observe when they do so. If we disregard this aspect for now, the fact
that people are incoherent or irrational allows policy makers to use their own judgment
about what is best for people. At the same time, the government should not unnecessarily
interfere with people’s lives, as embodied in concepts such as libertarian paternalism
(Sunstein & Thaler 2003a,b) and regulation for conservatives (Camerer et al. 2003). For
example, if people stick with the default option, even if that option is the worst, there
is room for a policy maker to affect the design of the default option. The literature on
paternalism has received much opposition (see, e.g., Sugden 2008, 2010). We return to this
issue in Sections 6 and 7, below.
One important question is why people make incoherent decisions. Beshears et al. (2008)
discuss five factors: (a) limited personal experience, (b) complexity, (c) passive choice/
defaults, (d) third-party marketing, and (e) intertemporal choice. These factors can drive
a wedge between revealed preferences, i.e., those that rationalize the observed behavior,
and normative preferences, i.e., those that represent the individual’s actual interest. Many
of these factors are important or are present particularly in the context of actions and
goods related to the environment. For example, many decisions concerning the environment are complex and involve a long time horizon; climate change is the most obvious
example. Carlsson (2010) discusses the implications for the design of SP surveys. In particular, he suggests that surveys can be used to investigate the issues of complexity and
experience. This suggestion is not very controversial in the field of SP surveys, in which
these issues have long been discussed and investigated (see, e.g., Carlsson et al. 2011b,
DeShazo & Fermo 2002, Swait & Adamowicz 2001).
What are other implications of incoherent preferences for environmental economics
and environmental policy (apart from what we discuss above regarding paternalistic arguments for regulation)? One aspect with policy implications is the role of defaults and the
reluctance to make changes. In many circumstances, subjects are more likely to choose a
default alternative—irrespective of its characteristics—than if the same alternative had
1
The tools used in stated-preference (SP) methods are highly suitable for analyzing context dependence (Swait et al.
2002): The attribute-based random utility model can readily incorporate contextual elements, the survey instruments
can be adapted to different contexts, and it is easy to design different treatments with different contexts.
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to be actively chosen. This bears out, for example, in the areas of pension savings (Choi
et al. 2004, Cronqvist & Thaler 2004, Madrian & Shea 2001), health clubs (DellaVigna &
Malmendier 2006), and organ donation (Johnson & Goldstein 2003). In the area of green
energy, Pichert & Katsikopoulosa (2008) show that green defaults may significantly affect
the choice of green electricity. Yet Löfgren et al. (2012) show that, in the case of default
effects on the choice of CO2 offsets for air transport, experienced subjects do not suffer
from a default bias. There are two aspects of a default effect for environmental policy.
The first is that economic incentives/regulation may have to be stronger if there are
strong default effects on the market and the defaults are not environmentally friendly.
The second is that the regulator can use the tendency to choose defaults to promote
more environmentally friendly consumption such as, for example, forcing people to opt
out from the most environmentally friendly option.
Another important area for environmental policy is intertemporal choice and discounting. The policy recommendation for global warming depends critically on the
choice of discount rate (Nordhaus 2007, Stern 2007). One important question is thus
whether the revealed discount rate should be the discount rate used for discounting future
benefits and costs of an environmental policy. A second, and from a BE point of view
more interesting, issue is that revealed discount rates are not constant. Many studies show
that discount rates are higher in the short run than in the long run (see, e.g., Laibson
1997, Loewenstein & Prelec 1992). This finding raises a number of difficult questions.
In particular, hyperbolic discount rates imply that preferences are dynamically inconsistent or present biased (O’Donoghue & Rabin 1999). Thus, when making decisions that
involve intertemporal trade-offs, a person has two sets of revealed preferences. When
evaluating future benefits and costs, the individual uses a lower discount rate for the
future, which means that, for example, he or she will decide to invest in the future.
However, when the future arrives, the individual will use a higher discount rate and
may then end up not investing even if no relevant circumstances have changed. Therefore,
we cannot simply apply the revealed preferences as normative preferences, because the
revealed preferences are not dynamically consistent. O’Donoghue & Rabin (1999) discuss
this in detail and argue for basing welfare analysis on long-run preferences. They also
emphasize the underlying reason for the observed behavior. For example, in the case
of obese persons, the welfare conclusions are very different if the obesity is due to selfcontrol problems than if it is a result of a conscious decision that the benefits of eating
the food are larger than the negative consequences of being fat.
The final aspect of incoherent preferences that we wish to discuss is the observed large
differences between people’s maximum willingness to pay for a good (WTP) and their
minimum willingness to accept not having it (WTA). In most cases, WTA exceeds WTP by
a substantial margin (Horowitz & McConnell 2002). It is doubtful whether standard
theory can explain the large differences. Hanemann (1991) argues that the observed large
differences are consistent with standard theory if the degree of complementarity between
income and the good to be valued is sufficiently strong. However, others argue that this
consideration is not sufficient to explain the observed results (Horowitz & McConnell
2003, Sugden 1999). Researchers have put forward a number of alternative explanations.
One explanation in particular is that people have a loss aversion, which means that losses
(reflected by WTA) tend to loom larger than gains (reflected by WTP) also for marginal
changes; see, e.g., Kahneman & Tversky (1979) and Knetsch (1989). Although this explanation seems plausible, it does not show why the difference between WTP and WTA is
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larger for public goods than for private goods (Horowitz & McConnell 2002). Biel et al.
(2011) argue that differences in emotions and moral perceptions can explain the difference between WTP and WTA, which also explains why there is a difference between
public goods, which have an ethical dimension, and private goods, which do not have
an ethical dimension.
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6. RISK MISPERCEPTION AND AMBIGUITY AVERSION
All areas of public policy in a modern society have to deal with risks, in particular when
one is dealing with environmental issues. For example, how should we deal with issues
such as global warming, biodiversity, and health effects from toxic substances in food?
Similarly, how should we deal with uncertain positive effects associated with activities
that cause potential environmental problems? Risk has long been incorporated into mainstream economic theory (e.g., Arrow 1971, Drèze 1987), yet there are many problems
with applying the conventional approach in practice. In this section, we focus on two
aspects of risk for which BE has much to say: risk misperception and ambiguity aversion.
6.1. Risk Misperception
The public’s risk perception is often very different from that of experts, contrary to the
assumption in conventional theory. Examples of risk perception biases have been identified
in many areas, including air pollution and smoking. For example, researchers typically find
that people severely overestimate risks associated with outdoor air pollution compared
with risks associated with indoor pollution (Breyer 1993, Margolis 1996). Media attention
given to certain spectacular risks is one important reason (Pidgeon et al. 2003, Slovic
1986), and research in psychology indicates that people have difficulty dealing with probabilities when strong feelings are involved (e.g., Lowenstein et al. 2001). There is also
a general pattern that people overestimate small probabilities and underestimate large
probabilities (Tversky & Kahneman 1992).
However, that people often misperceive the size of a certain risk does not necessarily
imply that they also misperceive the size of a risk change. In Figure 1a, the risk belief s is
simply a proportional amplification of the actual risk r, implying both that the risk belief is
larger than the actual risk and that sr > 1 so that a change in the real risk implies a larger
perceived risk change. Similarly, in Figure 1b the risk belief is smaller than the actual
risk, and sr < 1 so that a change in the real risk implies a smaller perceived risk change.
However, there is plenty of evidence that people systematically overestimate small
risks and underestimate large ones. If the pattern is as in Figure 1c (see, e.g., Viscusi
1992, p. 117), then sr < 1 such that an objective risk increase (or decrease) will always
imply a smaller perceived risk increase (or decrease) regardless of whether people overor underestimate the risk. Thus, people’s risk belief may be much larger than the actual
risk, yet they may perceive the size of the risk change to be smaller than the true risk
change. According to Tversky & Kahneman (1992) and Gonzalez Wu (1999), a relationship as that shown in Figure 1d is more realistic. Here sr > 1 for sufficiently small
risk levels and sr < 1 for larger ones.
Taking the four cases in Figure 1 together, we can conclude that if s < r, then sr < 1.
However, the opposite does not hold; i.e., s > r does not imply that sr > 1. In other words,
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a
b
s, r
s, r
r
s (r )
r
( s > r ; sr >1)
s (r
( )
( s < r ; sr <1)
r
c
d
s r
s,
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r
s r
s,
r
s (r )
r
( s > r ; sr <1)
( s > r ; sr <1)
s (r )
( s < r ; sr <1)
( s < r ; sr <1)
( s > r ; sr >1)
r
r
Figure 1
Possible relations between the subjective risk and the objective risk. The scale on the horizontal axis
reflects the actual risk, and the solid curve reflects the risk belief (or the subjective risk) as a function
of the actual risk. From Johansson-Stenman (2008).
if people underestimate the risk, they will also underestimate the risk change, but if they
overestimate the risk, they will not necessarily overestimate the risk change.
From a policy perspective, it is not sufficient to know how people misperceive risks.
We also need to know what to do with this information. Should public policy in such
situations be based on the public’s risk perceptions, on risk perceptions of experts, or on
other criteria?
The issue of whose risk perceptions should ultimately count in public policy is not
new; see, e.g., Pollak (1998), Viscusi (2000), Johansson-Stenman (2008), and Salanie &
Treich (2009). According to Pollak (1998), most analysts agree that differences in risk
perception reflect differences not in values but in the understanding of the risk-related
facts and that public policy should be based on these facts rather than on people’s
(mis)perceptions. Along these lines, Viscusi (2000, p. 867) argues that to reduce illusory
fears, rather than real risks, “is a form of statistical murder in which lives are sacrificed.”
More fundamentally, the question is how the government should act when people make
mistakes or when the government believes that people make mistakes. According to
Harsanyi (1995, 1997), what should matter in social decision making is informed or true
preferences, i.e., the preferences a rational individual who is equipped with perfect information would have. Broome (1999) and Ng (1999) argue similarly. Recently, a literature
in which policy measures are based on different kinds of paternalism has emerged. For
example, Gruber & Köszegi (2001) argue in favor of cigarette taxation, not to internalize
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externalities (which they argue are limited) but to internalize what they denote as internalities, i.e., to help people act in accordance with their own ultimate will and interest.
See also Sugden (2008, 2010) and Bernheim & Rangel (2007, 2009) for different arguments and alternative choice–based approaches when people are to some extent irrational. Regardless of how one feels about such paternalistic policies, it is not easy to argue in
favor of time-inconsistent public policy to mimic the time inconsistencies of citizens.
If we intrinsically care about welfare rather than about choice, how will risk misperceptions affect environmental policy? In a cost-benefit analysis, the government would then
base its analysis on experts’ risk judgments rather than on those of laypeople. Moreover,
when cost-benefit analysis relies on people’s valuation, e.g., through contingent valuation
studies, these valuation numbers will be biased in the sense that they may not reflect the
monetary values of the corresponding welfare effects. However, again, that people may
overestimate a certain risk will not necessarily imply that they will overestimate a risk
change. However, if the patterns between subjective and objective risk follow Figure 1,
then if people underestimate a certain risk, they will also underestimate a risk change.
There are also some caveats. First, as argued, e.g., by Johansson-Stenman (2008), fears
constitute real welfare effects, and fears are often related to subjective risk rather than
to objective risk. Second, fears may induce people to change their private behavior in a
way that has welfare effects. For example, Blalock et al. (2009) find that after the 9/11
terror attacks, many travelers increased road transportation (which is less safe than air
travel) due to their decreased use of (the still) much safer air travel. Blalock et al. estimate that as many as 2,300 traffic deaths may be attributable to the effect of 9/11. For
both of these reasons, the government should care about subjective risk, and not only
about objective risk, if they care only about welfare effects and hence put no value on
freedom of choice or similar values.
6.2. Ambiguity Aversion
Evidence suggests that people often deviate systematically from von Neumann and
Morgenstern’s expected utility theory; see Starmer (2000) for a good overview of non–
expected utility theory. However, that people behave in ways that seem inconsistent with
rationality assumption does not necessarily mean that governmental policy should also
change its normative underpinnings. However, it has been argued that ambiguity aversion
does not imply irrationality and that governmental decision making should correspondingly reflect people’s ambiguity aversion rather than governments seeing ambiguity aversion as irrational.
Before we continue, let us explain that by ambiguity we mean uncertainty with respect
to the true underlying probability. On the basis of this definition, people often tend to
be ambiguity averse (Camerer & Weber 1992). A frequently used way to test whether
people are ambiguity averse is the following experiment: Consider an urn in which 30 balls
are red and 60 balls are either black or yellow. You do not know the relative shares of
black and yellow balls. How would you choose between gamble A and gamble B?
Gamble A
Gamble B
You receive $100 if you draw a red ball
You receive $100 if you draw a black ball
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Consider next the choice between gamble C and gamble D. Would you choose gamble C
or gamble D?
Gamble C
Gamble D
You receive $100 if you draw a ball that is
not black
You receive $100 if you draw a ball that is
not red
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Most people would choose A over B and D over C, which is denoted the Ellsberg (1961)
paradox (e.g., Becker & Brownson 1964, Slovic & Tversky 1974), because these combined
choices violate subjective expected utility theory. If you prefer A to B, your subjective
probability that the ball is red must be larger than your subjective probability that the
ball is black. If this is true, then the probability that the ball is either red or yellow (which is
the same as the probability that the ball is not black) must be larger than the probability
that the ball is either black or yellow (which is the same as the probability that the ball is
not red). Therefore, preferring A to B and D to C implies a contradiction.
This behavior can be explained as follows: In gamble A, the probability that the ball
is red is known and is given by 20/60 ¼ 1/3. In gamble B, the probability that the ball is
black is not known; it can be either lower or higher than 1/3 and can take any value from
0 to 2/3. If you are a bit pessimistic, you might conjecture that it is lower than 1/3, and
you will hence go for A.
Similarly, in gamble C, the probability that the ball is not black (i.e., either red or
yellow) is not known and can be anything from 1/3 to 1. In gamble D, in contrast,
the probability that the ball is not red (i.e., either black or yellow) is known and equals
40/60 ¼ 2/3. In the choice between gamble C and gamble D, an individual who is a bit
pessimistic regarding the probabilities in gamble C will go for gamble D.
Choosing A over B and choosing D over C, if these choices are taken separately, are
not inconsistent with subjective expected utility theory, and both choices may indeed seem
perfectly reasonable in isolation. If a firm offers you the choice to sell gamble A and to
instead obtain gamble B, it makes perfect sense to believe that the objective probability
that the ball is black is lower than 1/3. Hence you should turn down the offer; otherwise,
the expected profit for the firm would be negative. Similarly, if a firm offers you the
choice to sell gamble D and to instead obtain gamble C, it is reasonable to expect that
the objective probability that the ball is not black is lower than 2/3. Hence, you should
turn down this offer too. The violation of subjective expected utility theory is thus related
to simultaneously choosing A over B and choosing D over C, and not to each of these
choices separately.
Ambiguity aversion has been identified in many different experimental settings and
samples (Gilboa 2004, Sarin & Weber 1993), and researchers often find that people are
willing to spend substantial amounts of money to avoid ambiguous processes in favor of
processes that are equivalent in terms of expected utility theory (e.g., Chow & Sarin 2001).
There is also evidence in terms of conventional empirical studies that observed behavior
cannot be explained by conventional theory but is consistent with theories incorporating
ambiguity aversion (see Camerer & Weber 1992, Gilboa 2004, Mukerji & Tallon 2001).
Riddel & Shaw (2006) find, on the basis of survey evidence from Nevada residents, a
large effect of ambiguity on attitudes toward risks related to nuclear waste transport.
Theoretically, Treich (2010) shows that ambiguity aversion tends to increase the value of
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a statistical life. For theoretical models that can reflect ambiguity aversion and hence
explain the Ellsberg paradox, see, e.g., Gajdos et al. (2008) and Klibanoff et al. (2005).
As mentioned above, there is evidence that people are ambiguity averse. There is also
evidence that policy makers sometimes make decisions that seem to reflect ambiguity
aversion; see, e.g., Viscusi & Hamilton (1999) and Sunstein (2000, 2005). However, just
because we cannot derive an “ought” from an “is” does not necessarily mean that policy
making should reflect ambiguity aversion. Should it? More specifically, should ambiguity
aversion be seen as some kind of cognitive limitation and as such a reflection of irrationality, or at least bounded rationality, or should it be seen as reflecting some kind of genuine
preference that ought to be respected? This is no trivial question, and highly intelligent analysts have come to different conclusions. Our view, following, e.g., Al-Najjar &
Weinstein (2009), Drèze (1987), and Savage (1972), is basically in line with the former.
We think it is difficult to find good arguments in normative analysis against the axioms
underlying subjective expected utility theory, including Savage’s sure-thing principle,
which is typically sacrificed in alternative axiomatically motivated models of ambiguity
aversion. We also find no convincing argument for why compound lotteries should be
evaluated fundamentally differently than the resulting simple lotteries. However, the
normative literature on ambiguity aversion is increasing; see, e.g., Gilboa et al. (2009)
for arguments that it is not more irrational to be ambiguity averse than to be a subjective
expected utility maximizer.
Nevertheless, there are also some caveats here, of which some are similar to the ones
dealing with risk misperceptions. First, choice situations under ambiguity may induce
fear to a larger extent, and it appears just as reasonable to deal with this kind of fear
as to deal with other kinds of negative welfare effects, as recently argued also by Treich
(2010). More generally, people may experience feelings such as regret (Loomes & Sugden
1982) through the decision processes per se. In principle, one can describe the different
states of the world to which subjective expected utility theory applies in a comprehensive
way that includes such feelings. Second, effects of fear and other feelings may induce
indirect welfare effects through consumer adaptations, and such effects should, in principle, be considered. Third, there are always a large number of risks involved in decision
making. For practical reasons, most of these risks are typically ignored, implying that
for some variables we tend to rely on best guesses, which tend to be that nothing bad will
happen. Such a systematic pattern implies that the overall social risk tends to be biased
downward. One could therefore argue that ambiguity aversion may be a way to correct for
neglect of some risks involved in situations that are more complex. However, whether it
is a good way is less obvious.
7. BEHAVIORAL LIMITATIONS OF THE REGULATOR
So far in this review we focus on the behavioral limitations and biases of the market actors.
We also suggest above that because of these limitations and biases there is room for a
regulator to improve the welfare of the people. The basic argument in the literature is
that—because people are not always rational but instead suffer from a range of biases
such as context dependence, optimism bias, present bias, and status quo bias—the government can intervene and improve the welfare of the people. However, the proponents
of such interventions typically emphasize that the government should not unnecessarily
interfere with the lives of the individual and argue that its policy suggestions should be
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minimal and affect only things such as the default alternative. Leading proponents of
this type of libertarian paternalism include Sunstein & Thaler (2003a,b) and Camerer
et al. (2003). In one sense, this view is in stark contrast with the central elements of public
choice theory, with its focus on the possibility that regulators serve their own self-interest
and hence do not act in the interest of the public (Brennan & Buchanan 1980, Mueller 2003).
Of course, arguing for a policy intervention is not in direct contrast to the view that
regulators may act in their self-interest. However, one of the main arguments against these
types of soft paternalism regulations is that, although these regulations are not intrusive,
they open up the possibility for more undesirable polices in the future. Whitman & Rizzo
(2007) argue against soft paternalism regulations largely on the basis of such a slipperyslope argument. Thus, their argument against the regulations does not concern the regulations per se—they may in fact be welfare improving—but rather that these regulations
pave the way for other types of regulations that are not welfare improving. In particular,
they argue that the theoretical and empirical vagueness of the BE literature is problematic
when one is making a distinction between soft and hard paternalism. In addition, that
policy makers can be bounded rational and suffer from the very same biases, such as context dependence and optimism bias, increases the risk that more intrusive regulations could
follow from soft paternalism.
However, most environmental policies cannot be considered soft regulations; the main
motivation for the policies is not bounded rationality of the individuals but that consumption and production in society are associated with negative externalities. In addition,
environmental problems are often complex and are associated with large uncertainties or
even unknown risks, factors that we discuss above as being important in explaining the
occurrence of bounded rationality and errors in decision making. Obviously, not only
private decision makers but also government decision makers could suffer from such
problems. A number of interesting issues then arise. It is realistic to assume that people
working with environmental management and regulation have more information about
environmental problems than does the public. However, this assumption does not mean
that such experts do not suffer from cognitive limitations when making their decisions
or recommendations.
Moreover, Gleaser (2005) argues that government decision makers have smaller incentives than do private decision makers to overcome errors. This argument is based on
the fact that errors are endogenous and can be corrected with costly effort (Frey &
Eichenberger 1994). Thus, individuals have stronger incentives than do government decision makers to invest in information that improves decision making, even if the government decision maker is altruistic. A counterargument is that the government may have
access to better information from the start, for example, through better learning technology. This argument at least limits the implications of behavioral limitations for environmental policies, but the standard externality argument is still valid.
What types of biases are likely to be important for government regulation? Tansic
(2011) discusses a number of biases, including action bias, focusing illusion, and illusion
of competence. Action bias is the tendency to overreact to risks and uncertainties (Patt &
Zeckhauser 2000). Thus, when faced with new information or unexpected events, policy
makers may have a tendency to overreact and take action, in particular because they often
get credit from media and voters for taking action. A focusing illusion implies that individuals overestimate the impact of one factor on the overall situation (Kahneman et al.
2006). With respect to government regulation, there is a risk that regulators focus on
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one, potentially important, aspect of the regulation and disregard all other aspects. Finally,
an illusion of competence, or overconfidence, is that people tend to overestimate their own
knowledge or competence (Fischhoff et al. 1977). Tansic (2011) argues that regulators
exceedingly believe that they understand how complex markets work and therefore how
welfare-improving policies could be implemented.
Another question that environmental policy making raises is to what extent government
decision makers have preferences that are similar to those of the public regarding environmental policies. Only a few recent economic studies have investigated this question. For
example, Colombo et al. (2009) find relatively similar rankings of attributes of environmental policies between citizens and experts, whereas McConnell & Strand (1997) find
differences in the WTP between scientists and the general public. Finally, both Carlsson
et al. (2011a) and Alberini et al. (2006) find that not even the rankings of attributes of
policies are the same between citizens and decision makers in the area of environmental
policies. Thus, even if the policy maker is trying to make decisions that are good for
citizens, his or her priorities are likely to differ from those of citizens.
8. CONCLUSIONS
This article discusses how insights from BE may affect policy recommendations in environmental economics. BE enriches environmental economics in bringing environmental
economics closer to reality and thus becoming more relevant. We also show here nonnegligible policy implications, although some of these are smaller than previously claimed.
For example, it is sometimes argued that crowding-out mechanisms make economic policy
instruments less suitable to deal with environmental issues and that the observation that
people sometimes cooperate even when it is not in their narrow material interest to do so
is an argument for less stringent official policy instruments. However, although intrinsic
motives can sometimes be crowded out by monetary incentives, we argue above that
monetary incentives will sometimes amplify intrinsic motivation and that, despite the fact
that people sometimes cooperate voluntarily, such cooperation is rarely sustained in the
long run without some kind of sanction against free-riding behavior. Overall, insights from
BE tend to reinforce, rather than make obsolete, the conclusion that we need explicit incentives to effectively as well as efficiently deal with environmental problems.
DISCLOSURE STATEMENT
The authors are not aware of any affiliations, memberships, funding, or financial holdings
that might be perceived as affecting the objectivity of this review.
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Contents
Volume 4, 2012
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by Goteborg University Library (via Stanford) on 10/20/12. For personal use only.
Prefatory
A Conversation with Arnold Harberger
Arnold C. Harberger and Richard Just . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Environmental Economics and Public Policy
Adoption Versus Adaptation, with Emphasis on Climate Change
David Zilberman, Jinhua Zhao, and Amir Heiman . . . . . . . . . . . . . . . . . 27
Including Jobs in Benefit-Cost Analysis
Timothy J. Bartik . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Behavioral Economics and Environmental Policy
Fredrik Carlsson and Olof Johansson-Stenman . . . . . . . . . . . . . . . . . . . . 75
Environmental Tax Reform: Principles from Theory and Practice
Ian W.H. Parry, John Norregaard, and Dirk Heine . . . . . . . . . . . . . . . . 101
The Impact of Agricultural and Natural Resource Management on
Global Warming
Carbon Sequestration in Forests and Soils
Roger Sedjo and Brent Sohngen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
An Overview of Carbon Offsets from Agriculture
Jimena González-Ramírez, Catherine L. Kling, and Adriana Valcu . . . . 145
Measuring Indirect Land Use Change with Biofuels: Implications for Policy
Madhu Khanna and Christine L. Crago . . . . . . . . . . . . . . . . . . . . . . . . . 161
Agricultural Risks, Markets, and Trade
Commodity Prices over Two Centuries: Trends, Volatility, and Impact
Jeffrey G. Williamson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
On the Value of Agricultural Biodiversity
Salvatore Di Falco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
viii
The Economics of the Food System Revolution
Thomas Reardon and C. Peter Timmer . . . . . . . . . . . . . . . . . . . . . . . . . 225
Agricultural Trade: What Matters in the Doha Round?
David Laborde and Will Martin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
Resource Economics
Annu. Rev. Resour. Econ. 2012.4:75-99. Downloaded from www.annualreviews.org
by Goteborg University Library (via Stanford) on 10/20/12. For personal use only.
(The Economics of) Discounting: Unbalanced Growth, Uncertainty,
and Spatial Considerations
Thomas Sterner and Efthymia Kyriakopoulou . . . . . . . . . . . . . . . . . . . . 285
Taking Stock of Malthus: Modeling the Collapse of Historical Civilizations
Rafael Reuveny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
International Trade in Natural Resources: Practice and Policy
Michele Ruta and Anthony J. Venables. . . . . . . . . . . . . . . . . . . . . . . . . . 331
The Origins and Ideals of Water Resource Economics in the United States
Ronald C. Griffin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
The New Fisheries Economics: Incentives Across Many Margins
Martin D. Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379
Errata
An online log of corrections to Annual Review of Resource Economics
articles may be found at http://resource.annualreviews.org
Contents
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